Feature

The Unknown Life Insurer

Newly public life-insurer and retirement-services outfit ING U.S. is undervalued and misunderstood, trading at half the valuation of some of its rivals. Why the shares could rise 30%—or more in a takeover.

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Even after a nice rally this year, life insurers carry some of the lowest valuations in the stock market based on such measures as price-to-earnings and price-to-book value. The newly public
ING U.S.voya 0.5659448818897638%Voya Financial Inc.U.S.: NYSEUSD40.87
0.230.5659448818897638%
/Date(1481308434409-0600)/
Volume (Delayed 15m)
:
535962
P/E Ratio
N/AMarket Cap
7909437718.12622
Dividend Yield
0.09793120332966092% Rev. per Employee
1484140More quote details and news »voyainYour ValueYour ChangeShort position
(ticker: VOYA) looks even cheaper. Much cheaper, in fact.

The average U.S. life insurer trades at about book value, based on a conservative measure that excludes unrealized investment gains. ING U.S., which was fetching just $24.70 on Friday, trades for 60% of its estimated book value of $41—and well below its total book value of $55, including unrealized investment gains.

AS PART OF A RESCUE package from the Dutch government in 2008, ING was required to shed its insurance and asset-management business. Its plan to spin off ING U.S. was approved by the European Commission last year. The shares came public on May 1 at $19.50. ING still holds 75% of ING U.S.

The forced sale of the U.S. life-insurance assets wasn't favored by ING Groep CEO Jan Hommen, who called it "significant destruction of capital" at the company's recent annual meeting. ING Groep is required to reduce its stake in ING U.S. to 50% by year-end 2014 and be out of it completely by Dec. 31, 2016.

Spinoff & Reorg Profiles analyst Bill Mitchell recommended ING immediately after it went public, below the anticipated range of $21 to $24 a share. He wrote that his bullish call was a rarity for "a promoted public offering. More often than not, IPOs are a bad deal, due to asymmetric information, moral hazard, face-ripping underwriters....We make an exception...because VOYA looks cheap; we believe that it looks cheap because the parent is in a hurry to satisfy EU regulators with a breakup."

Mitchell says, "It's so cheap that you can overlook its visible flaws." The flaws mainly are on the life-insurance side, including variable annuities.

Spin-Off Research thinks the stock is worth $31.50.

It could be worth even more in an acquisition. With a market value of $6 billion, it would be easily digestible for a large insurer.

In its prospectus, ING noted that it has 30 projects across the company to boost returns and that its goal is to lift its "operating return on capital from our ongoing business" to 10%-11% by 2016 from 7.2% last year.

The Bottom Line

With complex financials and concerns about its variable annuities, ING U.S. trades at a deep discount. Shares could rise 30%—or more in a takeover.

ING's financials are tough to assess, due to a headache-inducing 522-page IPO prospectus that carried multiple definitions of profits, arcane life-insurance terms, and nonstandard financial measures, like "operating return on capital from ongoing operations," as well as the muddying effect of hedging gains and losses related to the closed block of annuities.

ING U.S. said in the prospectus that it expected to earn about $280 million from its core operations in the first quarter; complete results are expected on May 23. Annualize that and make an assumption on taxes and corporate expenses, and the annual earnings power appears to be $2.50 a share. The company declined to comment.

CALLING ITSELF AMERICA'S Retirement Company, ING U.S. has a retirement-services unit that administered $214 billion of assets on Dec. 31, 2012, and managed $117 billion. Focused on small to midsize companies and government entities, it covers five million plan participants. It also manages $22 billion in retail mutual funds. Retirement services and investment management account for about 70% of operating profits.

The company's millstone is $42.5 billion of older variable annuities. These investment products, with attractive features involving death benefits and guaranteed returns, were sold to individuals. Those guarantees came back to haunt insurers when the bottom fell out of the stock market, and insurance regulators and the rating agencies required that sizable reserves be set aside against these policies.

All of the baggage associated with ING U.S. masks a healthy core business, plus a management team determined to improve returns. This may create a good investment story given the discounted price of ING U.S. shares.

Stealth Retirement Play

ING U.S. is the cheapest stock in a cheap sector, based on price-to-book value. Retirement services and asset management comprise about 70% of operating profits.